Your Dollars at Work: Making the Most of Your Flexible Spending Account

If you or your spouse has access to a FSA (flexible spending account) at work, you want to make the most of it. A FSA provides the employee with the ability to set aside a certain amount each year on a pre-tax basis and use the funds to pay certain qualified expenses.

There are medical, dependent care, and limited FSAs. Medical FSAs provide you with the ability to pay for certain qualified medical expenses, while dependent care FSAs allow you to pay for childcare expenses -- all on a pre-tax basis.

Your employer may also offer a limited purpose FSA, which generally provides for reimbursement of qualified vision and dental expenses. Unlike a general purpose medical FSA, a limited purpose FSA allows you to also contribute into an HSA (health savings account) if one is offered by your employer.

How much can you set aside?

As of January 1, 2013, health care reform set a $2,500 annual employee contribution cap for medical and limited flexible spending accounts. The annual contribution cap for dependent care accounts is $5,000 for a single parent or a married couple filing jointly, or $2,500 if you are married but filing separately.

What are the advantages?

The FSA is a tax-advantaged option, allowing you to use pre-tax dollars to pay for qualified medical expenses. For example, let’s say you set aside $1,000 for your medical FSA. You can use those dollars to get reimbursed for medical expenses on a pre-tax basis. The dollars that you set aside into your FSA are excluded from your taxable income. Without an FSA, you would still be paying for medical expenses but with after-tax dollars.

Whose medical expenses are covered?

Generally, expenses incurred by the employee, as well as the employee’s spouse and dependents are eligible for reimbursement under the FSA.

What are qualified medical expenses?

For medical HSAs, as a general rule, copays and co-insurance payments, medical supplies and medicines prescribed by a physician are qualified medical expenses eligible for reimbursement. Health care reform proscribed new rules regarding qualified medical expenses. Prior to 2011, over-the-counter medicines were considered to be qualified medical expenses, but effective January 1, 2011, such medicines are eligible for reimbursement under the FSA only with a prescription. The rule requiring prescriptions does not apply to medical supplies or insulin.

For limited purpose HSAs, the qualified expenses are dental and vision expenses such as dental work, lenses, eye exams, and similar costs. For dependent care HSAs, you can use the HSA to be reimbursed for child care (and other dependent care expenses) incurred because you or your spouse is working or seeking work.

Also, there is no double-dipping – you cannot claim the expense reimbursed under an FSA for reimbursement elsewhere or as a tax deduction. For example, you cannot take the federal dependent care tax credit if you’ve already submitted all those childcare expenses for reimbursement through your dependent care FSA.

What if you don’t use up all the money you set aside?

It used to be that if you failed to use up all the money you had set aside for the FSA for the year, you would lose it. So if you set aside $1,000 but incurred only $800 in qualified expenses by the end of the year, the leftover $200 would be forfeited.

Some plans had instituted a “grace period” that would allow an employee to incur reimbursable expenses an extra 2 ½ months after the end of a plan year. Using the previous example, if by the end of the plan year you had incurred only $800 in reimbursable expenses and still had $200 left, you would have until March 15 of the following year to incur the additional $200 in expenses and still be reimbursed under the previous plan year.

New for the 2014 plan year, employers may offer a “rollover” option which allows employees to roll over up to $500 dollars in unused FSA contributions to the next plan year. This means that if you have $200 left in unused FSA contributions at the end of a plan year, you can roll the $200 to the next plan year and have that entire next plan year to use those dollars toward reimbursable expenses. Your employer may choose to offer either a grace period or a rollover period, but not both.

How soon can you use the funds toward qualified expenses?

For medical FSAs (both general purpose and limited purpose), you can use all of the dollars you elected for the plan year at any time during the year. So if you elect $1,000 for the plan year and incur eligible medical expenses in that amount in January, you can be reimbursed the $1,000 in January.

However, for dependent care FSAs, you are only eligible for reimbursement of dependent care expenses that have actually been provided and you must accrue enough dollars in your FSA account to cover those expenses before you can be eligible for a reimbursement. So for example, if you elected $5,000 for the plan year in the dependent care FSA, you accrue $416.66 on a monthly basis. If your childcare costs are $1,000 monthly, you would need to wait a few months until you have accrued at least $1,000 in your FSA account in order to be reimbursed for one month of childcare.

Do you use an FSA? Have you found it to be useful in providing savings on medical and/or childcare expenses?

This post was written by Julie Borisov from Colorado PERA. Would you like to write a guest post for The Dime? Email us at dimecontact@copera.org.